Thursday, January 31, 2013

Bill Gates was impressively lucid on a wide range of topics. Very worthwhile interview. I did not plan on writing up the interview, so I did not take notes. But here is my takeaway, with a few comments:

Measurement. The private sector is inherently measurement-oriented because every company has to focus on making a profit. Government and NGOs do not have the same discipline. (Comment: Politicians must get elected in a democracy, and laws must get passed, both of which require counting votes. In the administration of government, budgets must be balanced at the state and local level and they can't be in deficit forever even at the national level. An NGO, similarly, has to quantify its results to raise the money it spends - unless a couple of big donors give it all the money it needs...)

Health Care Spending. Gates sees as a major challenge for the United States the problem of containing health care costs. With an aging population and a Federal commitment to paying for health care for the elderly and disabled, health care costs can become a monster. More attention must be focused on how to redesign health care services so that services are delivered more effectively and efficiently. This should not be a political battle; it should be a technological problem, measuring the right thing.

The Gates Foundation. Bill Gates wants to do something for humanity that can be measured. He is working on eradicating polio. Next is malaria. The foundation is heavily invested in health care world-wide, also in financial services (Grameen Bank, Pro Mujer etc.). But he made the point that the annual spending of the Gates Foundation is dwarfed by what governments spend on global problems, especially European governments. Domestically, the foundation focuses on education and finding out what works in getting through to students. The Foundation will be required to spend out its assets within 20 years after the Gateses die. (Comment: The Foundation has $36 billion in assets, topped up by Warren Buffett's huge gift.)

Carbon tax. A carbon tax is essential, he believes, and the cap-and-trade proposals were just an alternative way of trying to get through Congress. Without a carbon tax, there is insufficient incentive for people to rely less on fossil fuels.

Nuclear power. He thinks the Fukushima Daiichi nuclear disasters were a setback for the global environment because they have meant a loss of confidence in the current generation of nuclear reactors, which is a pity because they really are more environmentally friendly if they work, and the next generation of reactors will be much less reliant on human beings making the right decisions - they are much safer.

Fracking. Gates believes that the problems with fracking have been overstated - water, for example, can be recycled so that there does not have to be constant runoff to the water table. He is more concerned with sequestering the emissions from burning natural gas.

Microsoft's Future. He says that he, as Chairman, is very self-critical, so the fact that Microsoft missed the cell phone potential is something he is aware of. But he believes is that Microsoft's biggest competitor is Google and that other large website players are not so much into software development - Amazon, for example, or Facebook. He thinks Microsoft is well positioned for the future. (Comment: The late Steve Jobs famously said - http://www.winrumors.com/bill-gates-responds-to-steve-jobs-criticisms/ - that Gates ripped off other people's ideas and was not imaginative. Gates is less interested in trading claims, and just says he and Jobs were friendly competitors for 30 years... But Melinda Gates said in 2010 there are no Apple products in the Gates home.)

Wednesday, January 30, 2013

Here's how I see the Great Debate about monetary policy, with John Taylor opening with an op-ed in the Wall Street Journal (http://on.wsj.com/VY0Iet) on the Fed being a drag on the economy through its continued zero-interest rate FOMC directive and Paul Krugman lambasting him via his NY Times perch for arguing that the low interest rates are inhibiting lending. (http://nyti.ms/VwkXU7):

Taylor is a "hard money" man (consistent with the dour mien of John Calvin, although Krugman says he has Calvin of Calvin & Hobbes in mind), unhappy at low interest rates that don't sufficiently reward prudent savers/debt-holders, so that banks withhold loans. Krugman has maintained consistently that the economy has not been stimulated enough on the fiscal side after the meltdown in 2008 and therefore staying at the zero-interest-rate bound at the short end of the market is a consequence; he is a continued-easy-money man.

Krugman's answer to Taylor's argument is that his theoretical framework is one of a ceiling, which is inappropriate. In fact the FOMC directs open market operations (buying short-term Treasury bills to put cash into the economy), and the equivalent in the longer end of the bond market, Quantitative Easing (buying longer-term Treasurys to bring down longer-term rates) also operates in the open market for debt.

The Fed does not regulate interest rates. It just buys and sells Treasurys.

For those who don't have time to pore through this exchange and its 60+ comments, I excerpt three comments that were posted around 9 am this morning to exemplify the struggle that the commentators have to be fair and to try to figure out who is right.

Justin - Brooklyn, NY: Can anyone kindly explain what this sentence is purporting to say? (I know that Krugman is refuting it, but this went over my head.): "low rates engineered by the Fed are just like a price ceiling that reduces the supply of loans, and therefore reduces overall lending."

AndyfromTucson - Tucson AZ: The reasoning is that the interest rate is the price paid for borrowing money, and so if the government caps the price at an artificially low level then it will reduce the supply of loans. Like if the government put a $5000 cap on the price of new automobiles all the car manufacturers would cut production. What Krugman is saying is that interest rates are not a legal cap, so this analysis doesn't work. Jan. 30, 2013 at 9:41 a.m.save10percent - Denver, CO: My understanding of it is that as the price goes down (talking about the cost of taking out a loan, which is the interest paid), the quantity demanded goes up, but the quantity supplied goes down (econ 101). Taylor is saying that the fed sets the price ceiling too low and therefore banks aren't lending (less supply). Krugman says that the fed does not set a price ceiling for the interest on loans that banks make, so Taylor's argument doesn't make sense.

I have no doubt that Taylor will be back with an involved explanation why he was misunderstood. Meanwhile the winner of the debate pro tem is Paul Krugman and as one commentator observes, we can be glad that Gov. Mitt Romney did not win the presidential election, because if he had, Prof. Taylor was in line to become his Treasury Secretary.

One use of the quarterly GDP growth figures is a check on how hot the economy is.

Watching the GDP figures is like a cook's tasting the soup periodically to see how hot it is.

The Bureau of Economic Analysis came out with its "Advance" estimate of fourth-quarter 2012 growth and it is slightly negative, minus 0.1 percent. Not too hot.

The figure for 2012 comes to 2.2 percent real GDP growth, in line with the last two years after the horrendous drop in 2008-2009 (see the chart above that I created easily from the helpful BEA Excel spreadsheet on its website - http://www.bea.gov/national/index.htm#gdp).

The negative figure is surely a surprise to most economists. Maybe not Paul Krugman, who has been arguing that the deficit-reduction talk is way premature and we must keep stimulating the economy until the evil effects of the meltdown in 2008 are fully played out.

But the BEA emphasizes in its press release this morning - which I tweeted as @cityeconomist - that the Advance estimate is based on early and incomplete data - the message is that it may well be revised up to a positive figure next month, but meanwhile Dr. Krugman has the opportunity to tell the GOP members of Congress: "I told you so."

On the other hand, world GDP has been slowing down (http://www.economist.com/blogs/graphicdetail/2013/01/focus-world-gdp) and this could be a drag on U.S. growth.

The annual forecasting meeting of the New York Association for Business Economics took place today and the tone was one of: "We are definitely climbing out of the abyss that we went into in 2008, but it will take some more time."

At an earlier NYABE lunch in December 2008, former Fed Governor Lawrence Meyer said that with the arrival of zero-bound Fed policies, the Federal Open Market Committee might as well take a long vacation. Does it really require the seven members of the Board of Governors plus five of the 12 Reserve Bank presidents to decide how many Treasury bonds to buy in the open market via Quantitative Easing? Scaling back the QE level is expected in 2013, then (not till 2014) a raising of the target Fed Funds rate.

My takeaway is that the five years at least of the ZBE (Zero Bound Era) is a kind of Purgatory to which we are all condemned until we fully understand why we are in it. Several theories were advanced - see below under "Negatives" and "Mixed News".

The program was chaired by Dean Maki of Barclays, and the panel included Joseph LaVorgna, Chief US Economist of Deutsche Bank Securities, Kevin Logan, Chief US Economist, HSBC Securities, and Bruce Kasman, Chief Economist, JP Morgan.

All three panelists used slide shows. The first two had one chart per slide and only talked about the USA. The third had three charts per slide and focused on the global situation - "You can't understand the U.S. economy without looking at the rest of the world." The complete slides from all three presentations have been sent to members of the NYABE - you can join by going to www.nyabe.org; I recommend it.

POSITIVES - clearer picture of an exit from the abyss
The year 2012 was one of fear about a lot of things that are now settled, without terrible consequences.
High vacancy rates and rents below prior cycles suggests that rents (and imputed owner income) must rise.
The abyss resulted from a failure of government regulation of financial services and housing.
These three sectors are now paying the price - construction, financial services, government.
Job growth most likely in these three areas as the recovery progresses.
Household (and nonprofit) debt as percent of GDP near long-term trend.
This will help reinvestment in housing and more construction will mean more demand for building materials.

NEGATIVES - continuing drags on growth
Consumer spending is weak, mostly in services area.
Durables spending is in line with previous recovery cycles.
End of 2% payroll tax holiday is the equivalent of about $1,000 more tax on the average family.
In the boom years, people turned their homes into ATM machines via home-equity loans.
Now they are reducing their loan exposure, partly because of foreclosures, partly mortgage pay-downs.
Continued "debt deleveraging" (reducing outstanding loans) means a lower growth outlook.
This means a shift in the long-term trend of growth in real consumer spending from 2.8 percent to 2.2 percent.
The employment/population ration reached near 64 percent at the peak of the boom.
Now it is stuck near 58 percent.
Import prices are not rising - which is good for containing U.S. inflation.
Government fiscal problems continue, which means offsetting reductions in spending.
This will be a drag on overall growth.

MIXED NEWS - depends on whether you are looking at it as a worker or a consumer
Wage rates are not recovering.
In 2012, the wage gain was the smallest since the early 1960s, 1.5 percent.
In manufacturing, the wage gain was the smallest since the 1950s.
This is, needless to say, not good for workers.
But it means that cost-push inflationary pressures remain muted.

A good session. God is in the details, which are partly incorporated in the slides of the three panelists.

This morning, January 19, on the first page of The New York Times Business Section, I read Ron Lieber ("Your Money") on "Finding Advice for More Modest Retirement Investments". He makes a significant off-hand reference to "annuity-peddling scoundrels".

So I am re-posting some of what I said yesterday, expanded (and modified) in light of Lieber's comment and some data that he references. The chart above shows tax-advantaged non-annuity retirement assets, as of the third quarter of 2012.

The Direct Benefit and Government plans are mostly safe from predatory annuitization because they are already paid out in that form and it is often not easy to take out the money in a lump sum.

But I worry that some people who own a piece of the $5.3 trillion of IRA assets or $5.0 trillion of Direct Contribution plans (401k, 403b, 457 etc.) might be persuaded to convert their assets to an annuity.

Pension industry posts suggest that annuities are seen by some as a new gold mine for people in the insurance industry. One writer suggests that annuities are a great opportunity to expand one's income. The writer is referring to the income of sellers of insurance products.

In principle, economists like annuities because in theory they best match the need for people to have income until they die with a product that does it. Even President Obama is quoted as favoring annuities in a retirement strategy.

So yes, in some situations an annuity might make sense: (1) Liquid assets that are not tax-protected. (2) Severance payments. An annuity might be a good way to make sure the money lasts as long as you do.

But if the prospects that are being pursued by annuity sellers are largely in tax-advantaged investments, they need to be very careful or they will be giving away a big piece of their retirement assets by buying annuities:
- Their risks go up because they are giving up control of their money. If there is a sudden need for capital, all they are getting is the regular return. This is a huge loss of access. This is inherently desirable only when the annuity is being sold to someone who cannot make financial decisions rationally and for whom the capital is tempting to spend.
- Insurance companies love annuities because they get to invest the money - so they pay their agents well to sell them. I have heard as much as 12 percent of the purchase price can go to the agent. Someone is going to pay for this, namely buyers in the returns they get.
- In the current interest-rate climate interest rates are bound to be on the conservative side. We have had a zero-bound environment for four years. Who says this environment is going to change soon? (I have said elsewhere that we are in a zero-bound purgatory that will last until we figure out why we are in it and why it is not heaven. No sign we are there yet.)

So if what you have is a 401k or an IRA, it is crazy to roll them over into an annuity. Far better to maintain control of them and when you get to be 70.5 years old, take the Minimum Required Distribution every year. For no fee, just the cost of the transaction, with no 12% load, the mutual fund or broker will figure out the MRD and pay it out like an annuity. Yet you still have control of the underlying assets and in an emergency you have access to them. You also don't pay taxes on the income until you take it out.

Maybe I am just imagining a problem that doesn't exist. Maybe none of the 8.7 percent of retirement assets that are in annuities were rolled over from tax-advantaged retirement assets. But given the temptation and what we saw happen in the mortgage industry, I fear the worst and would love to see data that would either confirm or contradict my concern. The Investment Company Institute does not show on p. 122 of its 2012 Fact Book.the value of IRA accounts that were totally withdrawn. I would like to know that number.

In my view, agents who sell an annuity to someone to be paid for by selling a tax-advantaged retirement asset should have their license taken away.

Friday, January 18, 2013

Pension industry posts suggest that annuities are a new gold mine for people in the insurance industry. One writer suggests that annuities are a great opportunity to expand one's income. The writer is referring to the income of sellers of insurance products.

In principle, economists like annuities because they seem to match the need for people to have income until they die with a product that does it. Even President Obama is quoted as favoring annuities in a retirement strategy.

So yes, in some situations an annuity might make sense - let's say you don't know what to do with Lottery winnings, An annuity might be a good way to make sure the money lasts as long as you do.

But buyers of annuities need to be very careful or they will be throwing money away:
- Their risks go up because they are giving up control of their money. If there is a sudden need for capital, all they are getting is the regular return. This is a huge loss of access. This is inherently desirable only when the annuity is being sold to someone who cannot make financial decisions rationally and for whom the capital is tempting to spend.
- Insurance companies love annuities because they get to invest the money - so they pay their agents well to sell them. I have heard as much as 12 percent of the purchase price can go to the agent. Someone is going to pay for this, namely buyers in the returns they get.
- In the current interest-rate climate interest rates are bound to be on the conservative side. We have had a zero-bound environment for four years. Who says this environment is going to change soon? (I have said elsewhere that we are in a zero-bound purgatory that will last until we figure out why we are in it and why it is not heaven. No sign we are there yet.)

If what you have is a 401k or an IRA, it is crazy to roll them over into an annuity. Far better to maintain control of them and when you get to be 70.5 years old, take the Minimum Required Distribution. For no fee, just the cost of the transaction, with no 12% load, the mutual fund or broker will figure out the MRD and pay it out like an annuity. Yet you still have control of the underlying assets and in an emergency you have access to them. You also don't pay taxes on the income until you take it out.

In my view it should be against the law to roll a retirement fund over into an annuity. Just saying.

Wednesday, January 16, 2013

My story on the history of the trillion-dollar Palladium (Platinum) coin was published today by Huffington Post. I wrote it before the Fed and Treasury decided to rule out issuance of the platinum coin. (HuffPost sometimes takes a couple of days to post things, often because of rights issues relating to images.)

I obtained permission to use the image of the "Woodin Nickel" for my blogs (see January 11 post below), but HuffPost must have decided the terms of the permission did not apply to them, and only to my personal posts on Google Blogger. So only the $25 platinum coin approved in 2010 is shown in their post, courtesy of the U.S. Mint.

In this post I am including two photos of Will Woodin that were generously loaned to me for copying, to accompany what I might write about Woodin, by his granddaughter Anne Harvey Gerli.

This is Will Woodin with his beloved guitar, outside
the U.S. Embassy to Cuba. Photo by permission
of Anne Harvey Gerli, Woodin's granddaughter.

Here Will Woodin is proudly displaying his
catch of the day. East Hampton? Pennsylvania?
Photo by permission of Anne Harvey Gerli.

Sunday, January 13, 2013

The elephant in the room at the Treasury and Fed is the fear of being accused of "monetizing the debt". When the country is at the "zero bound" where interest rates on Federal debt are being constrained by Federal Open Market Committee policy to approach near-zero percent, then the difference between debt and money approaches near-zero.

So why the Treasury and Fed concern about a palladium coin valued at $1 trillion? It would solve the big problem of the debt ceiling. Paul Krugman has pointed out in his column in the print edition of the NY Times on Friday, January 11, that the Congress failing to authorize the debt ceiling forces the Executive Branch to withhold authorized payments, which blurs the roles of the Executive and Legislative branches.

Raising the debt ceiling wouldn't grant the president any new powers... [and] if the debt ceiling isn't raised, the president will be forced to break the law; either he borrows funds in defiance of Congress, or he fails to spend money Congress has told him to spend.

The palladium coin would also not appear to require Congressional approval - although the law does seem to require a "marketing plan" for the coin to be submitted to the Congress and a $25 palladium coin issue went through the Congressional legislative process in 2009-2010 as I have previously noted.

Here are some objections:
1. Separation of fiscal and monetary policy is an article of institutional and theoretical faith than no one wants to interfere with. For the Treasury to issue a trillion-dollar coin to deposit at the Treasury would open up all kinds of questions about this separation.
2. The zero-bound situation is temporary and everyone would like to escape from this difficult world as soon as possible. Former Fed Governor Larry Meyers said in December 2008 that at the zero bound the FOMC has nothing much to do and they should all take a very long vacation. I am sure, however, he was not expecting the vacation to last until 2013.
3. A system with Federal Reserve independence is more resilient than one where the Fed and Treasury are combined. It's the 100th anniversary of the creation of the Fed, which was created to maintain orderly financial markets (the Fed was a remedy for the Bankers Panics of 1907-1908) and to preserve the value of the dollar. The fear that a head of state might tamper with the money supply to finance a war or excessive consumption is well founded. A monetary authority protecting the value of the people's money is a widely emulated institution.

So, however annoyed we may be about GOP misuse of the debt ceiling as a bargaining chip for something else, and thereby interfering with the conduct of government, the Treasury and Fed are right in opposing something that would blur the distinction between them.

However, some other plan better be ready to thwart a debt-ceiling blackmail.

One suggested way to address the debt limit challenge is for the U.S. Treasury to issue a trillion-dollar coin and then deposit it with the Federal Reserve System as cash. I'm not a lawyer, so I will not opine on the legality of any proposed action. However, I can read. I can look up the law. I can post it herewith.

The authority for minting a trillion-dollar "platinum" coin appears to come from U.S. Code 31, #5112, subsection (v). The reference is to palladium, which is in the family of "white gold" platinum elements, but has different characteristics from platinum. Note that the law in clause (v) (3) sets a minimum price for any minted coin, i.e., the cost of acquiring the metal and the cost of minting the coin. It does not have a maximum price. Here is the entire subsection, from the Cornell Law School website (see link at the end).

(v)Palladium Bullion Investment Coins.—

(1)In general.—Subject to the submission to the Secretary and the Congress of a marketing study described in paragraph (8), beginning not more than 1 year after the submission of the study to the Secretary and the Congress, the Secretary shall mint and issue the palladium coins described in paragraph (12) of subsection (a) in such quantities as the Secretary may determine to be appropriate to meet demand.

(2)Source of bullion.—

(A)In general.—The Secretary shall acquire bullion for the palladium coins issued under this subsection by purchase of palladium mined from natural deposits in the United States, or in a territory or possession of the United States, within 1 year after the month in which the ore from which it is derived was mined. If no such palladium is available or if it is not economically feasible to obtain such palladium, the Secretary may obtain palladium for the palladium coins described in paragraph (12) of subsection (a) from other available sources.

(B)Price of bullion.—The Secretary shall pay not more than the average world price for the palladium under subparagraph (A).

(3)Sale of coins.—Each coin issued under this subsection shall be sold for an amount the Secretary determines to be appropriate, but not less than the sum of—

(A) the market value of the bullion at the time of sale; and

(B) the cost of designing and issuing the coins, including labor, materials, dies, use of machinery, overhead expenses, marketing, distribution, and shipping.

(4)Treatment.—For purposes of section 5134 and 5136, all coins minted under this subsection shall be considered to be numismatic items.

(5)Quality.—The Secretary may issue the coins described in paragraph (1) in both proof and uncirculated versions, except that, should the Secretary determine that it is appropriate to issue proof or uncirculated versions of such coin, the Secretary shall, to the greatest extent possible, ensure that the surface treatment of each year’s proof or uncirculated version differs in some material way from that of the preceding year.

(6)Design.—Coins minted and issued under this subsection shall bear designs on the obverse and reverse that are close likenesses of the work of famed American coin designer and medallic artist Adolph Alexander Weinman—

(A) the obverse shall bear a high-relief likeness of the “Winged Liberty” design used on the obverse of the so-called “Mercury dime”;

(B) the reverse shall bear a high-relief version of the reverse design of the 1907 American Institute of Architects medal; and

(C) the coin shall bear such other inscriptions, including “Liberty”, “In God We Trust”, “United States of America”, the denomination and weight of the coin and the fineness of the metal, as the Secretary determines to be appropriate and in keeping with the original design.

(7)Mint facility.—Any United States mint, other than the United States Mint at West Point, New York, may be used to strike coins minted under this subsection other than any proof version of any such coin. If the Secretary determines that it is appropriate to issue any proof version of such coin, coins of such version shall be struck only at the United States Mint at West Point, New York.

(8)Marketing study defined.—The market study described in paragraph (1) means an analysis of the market for palladium bullion investments conducted by a reputable, independent third party that demonstrates that there would be adequate demand for palladium bullion coins produced by the United States Mint to ensure that such coins could be minted and issued at no net cost to taxpayers.

Thursday, January 10, 2013

New York State Packs of Cigarettes Sold, Taxed and Untaxed.
Number of packs in millions and tax in $millions.

The Tax Foundation just put out a report saying that New York State has the biggest cigarette smuggling problem of any state in the USA.

It blames the high $4.35/pack cigarette tax. However, a cigarette tax is a Pigovian tax, saving money on NY State health-care costs if smokers are discouraged from smoking by the higher cost.

On the other hand, if there are easy ways to bring in untaxed cigarettes (e.g., by car from a neighboring state), then New York State benefits neither from the Pigou Effect (lower consumption of goods with high negative externalities) nor from the higher revenue it should have earned on the untaxed cigarettes.

What's the impact of the counterfeit on the budget? I have been doing this kind of work long enough to know that these calculations are complex. I have also been around enough to know that reasonable first approximations - if not distorted by subsequent misuse - usually provide pretty good policy guidance.

With that in mind, the chart above suggests that based on the Tax Foundation numbers and the amount actually collected in cigarette taxes in the latest fiscal year, New York State is losing $2.4 billion in uncollected cigarette-tax revenue. Now there's a budget gap-closer.

The nature of Pigovian taxes is that counterfeiting will always be with us. The snake in the Garden of Eden smuggled an illegal fruit into the diet of Adam and Eve. But the attempt to collect more revenue will either generate more income for NY State or it will reduce smoking. Either way, the State is ahead.